A management contract expands the service contract to include some or all of the management and operations of the government service (i.e., hospital management). Although the ultimate responsibility for service provision remains with the government partner, daily management control and authority are assigned to the private partner. In many cases, the private partner provides working capital only and does not finance the whole investment. Most management contracts are for 3 to 5 years.
Typically, the private partner is paid a predetermined amount for personnel and other anticipated operating costs. To provide an incentive for performance improvement, the contractor is awarded an additional amount for achieving certain targets or a bigger share of the profits. The private partner interacts with the patients while the government partner is responsible for setting hospital vision and missions, and service fee schedules.
The key advantage of a management contract is that many operational gains that result from private sector management can be achieved without transferring government assets to the private partner. These contracts are relatively easy to develop and can be less controversial than outright privatization.
However, if the private partner does not have control over personnel hiring and firing, and of subcontract negotiations, there is a risk that the private contractor will not be able to achieve deep and lasting change. However, if given too much control, there is also the risk that the private partner may take actions that are contrary to government social sensibilities such as equality, gender equality, pro-poor bias, etc. If the private partner is paid a portion of profits or given an incentive payment, safeguards are required to prevent overstatement of achievements. Government must also make sure that the private partner does not under-invest in asset maintenance, as the assets are provided by government, and not purchased by the private partner.